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Gear in Acquisition of Start-up Companies

Why Acquire a start-up?

The strategic acquisition of start-up can be one of the most important means of growth for your business. Unlike growth through increased market share and sales, acquisition offers a host of other advantages, including easier financing for future undertakings and immediate savings due to economies of scale. This also makes sure a reduction in competition for bigger companies. Acquisitions of start-up companies with innovative technologies further provide larger companies with several advantages apart from inorganic growth. Such acquisitions provide larger companies with inroads to a new market of innovative technology at a substantially lower cost.

Impact of Covid-19 Crisis on Start-ups:

India’s startup sector is bleeding due to business disruptions caused by the Covid-19 pandemic, with nine in ten startups registering a decline in revenues, according to a survey by technology industry body Nasscom. The two-month-long survey, which received responses from over 250 startups across sectors, found that 92% reported a decline in revenues, over 40% of startups have either temporarily halted operations or are in the process of shutting down, with around 70% having cash reserves to last less than 3 months. This has lead to the acquisition of start-up companies by big companies.

acquisition of start-up

Indian Startups Booming:

On a contrary note, many sectors of the economy have shown growth like never before. They include E-learning startups, E-Pharmacy startups,Online grocery shops. Companies such as BYJU’s, Whitehat Jr, Unacademy, Toppr, Vedantu have gained up to a 3 times surge in usage since the first phase of lock down.

Online pharmacies in India like Medlife, 1mg and PharmEasy are providing contact-less home delivery of medicines in bulk, different types of medicines on one platform, and also provide online prescription services with their registered set of doctors. Big Basket and Grofers, have nearly doubled the number of daily deliveries compared to the last month as more and more consumers are hitting the internet to buy essentials amid the COVID-19 lockdown.

Legal aspects:

COVID-19 Start-up Assistance Scheme: After recognizing the numerous financial and operational challenges faced by start-ups, the Small Industries Development Bank of India (“SIDBI”), which also operates as an implementing agency for the ‘Fund of Funds’ for start-ups, has promulgated a ‘COVID-19 Start-up Assistance Scheme’ (hereinafter “the Scheme”) which is intended to provide assistance to certain eligible start-ups that have successfully demonstrated the ability to implement innovative measures so as to ensure business continuity amidst the COVID-19 crisis, and has also ensured employee safety as also financial stability.

Eligibility criteria under the Scheme includes the following start-ups that have:

  1. at least 50 employees;
  2. a positive net worth;
  3. received funding through SEBI registered alternative investment funds or VC/PE/Angel funds that invest in startups;
  4. a minimum turnover between INR 20-60 crores ( for the Financial year 2019 and Financial year 2020);
  5. been incorporated for less than ten years; and meets the requirement of the promoters and, or founders of the start-up having invested their own capital in the businesses. Furthermore, under the Scheme, working capital loans of up to INR 2 crores at an interest rate of 10.5% would be provided to eligible start-ups for a period extendable to 36 months.

Also read about Ease of doing business in India

Major Instances of Merger and Acquisition during Covid Crisis in India:

In the first half of the calendar year 2020, out of all deal categories like inbound, outbound and domestic, the greatest M&A deal activity was witnessed in the domestic category which recorded 179 deals compared to 38 inbound and 24 outbound deals. The activity in the domestic category accounted for 64% of the overall deal activity; amounting to $11.9 billion of the total $22.8 billion seen in the first half of 2020.

-Bharti Airtel Ltd. has acquired a 10 percent stake in Gurugram-based startup Voice zen, which focuses on conversational artificial intelligence technologies in April 2020. -In May 2020,Intel acquires Israeli Startup Moovit, mobility data specialist, and journey planner app for $900 million.

Wipro which has been an active acquirer of companies such as HealthPlan Services (HPS), cloud enablement firm Appirio, design consultancies such as Designit and Cooper, and smaller firms like InfosSERVER and International TechneGroup; is also looking forward to the acquisition of start-up opportunities.

Conclusion:

To conclude, while the acquisition of start-up companies may look attractive it is required to keep the regulatory and deal-making aspects in the deal-making process in order for the acquisition to be successful. The pandemic has in a way created opportunities for more investments, acquisitions, and mergers. Experts say there are better chances of getting good deals right now.

“The initial shock of the COVID-19 outbreak has paused and delayed many deals. However, as executives shift their mindset from crisis management to strategic execution, M&A is expected to be a key lever that well-capitalized companies will use to accelerate recovery.”  EY global transactions technology leader Kenneth Welter 

This article is written by Mahima Rathod and edited by Rupreet Kaur Dhariwal.

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